As things stand now, if you're 52 or younger, Social Security will be able to pay only about 75% of scheduled benefits when you retire. Even a good portion of people already retired could experience significant benefit cuts in 15 years if the program runs out of funds as projected.
No one wants to see 25% across-the-board benefit cuts, so what should be done?
Should policymakers make Social Security bigger or smaller?
Well, that depends on what will be better for workers and their families.
Economist Drew Gonshorowski and I recently examined whether Americans would be better off paying more in taxes and receiving more from Social Security, or keeping more of their money in the first place.
We found that all Americans, regardless of income level, would be better off with a smaller, better-targeted Social Security system.
That's unfortunate news for members of the House of Representatives who are poised to pass the Social Security 2100 Act within the next month or so. Their bill takes the opposite tack, trying to make Social Security solvent by imposing super-sized tax increases.
SS 2100 isn't content with raising taxes just enough to prevent future benefit cuts, much less consider actually reducing payments to for higher-income retiree who don't really need "safety net" benefits. Instead, the bill "goes big" – hiking taxes high enough to raise benefits for current and future Social Security recipients.
Were the bill to pass, the Social Security tax rate would rise incrementally, starting next year. By 2043, it would be nearly 20% higher than today's 12.4% rate.
At that point, people making $50,000 a year would be paying $1,200 more per year than they pay today. With a 14.8% tax, their annual Social Security tax bill would be $7,400 – about as much as the average household spends each year on food.
Perhaps the most curious aspect of the Social Security 2100 Act is that it would increase benefits the most for wealthy Americans. A worker earning an average of $30,000 a year would receive $333 more in Social Security benefits while millionaires would get $12,333 more per year.
That's hardly in line with the purpose of a social safety net program.
The irony is that while benefits would increase for everyone under the Social Security 2100 Act, those increases are less than beneficiaries would have gained if lawmakers had just let them invest, on their own, the money the act forced them to fork over in additional Social Security taxes.
That's because, despite what politicians say, Social Security is not a personal savings program. It's a generational transfer program. Every dollar of workers' payroll taxes goes immediately to current retirees. Workers are deprived of the opportunity to invest that money and earn a positive return over time.
As our analysis shows, workers of all income levels would be better off keeping their own money than paying higher taxes and receiving higher Social Security benefits.
If young Americans were to keep and save the money that this new bill would take from them in taxes, the typical low-income earner would have $14,778 more in retirement; middle-income earners would have $37,601 more; and high-income earners would have $99,311 more.
That's at the individual level. The societal impact is even more profound.
Researchers at the University of Pennsylvania's Wharton School of Business looked at both the Social Security 2100 Act and a smaller, more targeted Social Security program – one with a more reasonable retirement age, more accurate inflation adjustment, and smaller benefits for middle- and upper-income earners.. They found that the economy would be 7.3% larger with a smaller Social Security program.
How is that so? As former Social Security Principal Deputy Commissioner Andrew Biggs explains: "The logic is straightforward: when taxes go up people work less; when Social Security benefits go up, people save less. If people work less and save less, the economy grows more slowly."
Slower growth compounds over time, bringing down family incomes. By 2043, the Penn Wharton analysis estimates, gross domestic product would be $1.6 trillion lower – an annual difference of $12,500 per household – if lawmakers "grow" Social Security as outlined in the Social Security 2100 Act rather than make it smaller and better-targeted.
While there is no way to undo Social Security's past excesses, Congress can curb the program's future growth and focus on its original purpose: protecting seniors from living in poverty. If lawmakers took this approach, the Social Security tax rate could decline to about 10% instead of rising to nearly 15%.
That would leave the average American worker with about $2,400 more in spendable income each year. That's $2,400 they can use however they want, based on what they know is best for their families.
This piece originally appeared in the Sacramento Bee